The Federal Housing Administration will launch a program on Sept. 7 that will allow underwater homeowners who are current on a non-FHA loan to refinance into an FHA-backed loan when their lender agrees to write off at least 10 percent of their principal.

The FHA Short Refinance program, originally announced in March, is designed to help homeowners in markets that have seen large declines in home values refinance into "a safer, more secure" mortgage, FHA Commissioner David Stevens said in a statement.

The FHA today published a letter providing guidance to lenders on implementing the program, which is voluntary and requires the consent of all lien holders.

The borrower’s existing first lien holder must agree to a "short payoff," writing off at least 10 percent of their unpaid principal balance. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

If the borrower has a second mortgage, their combined loan-to-value ratio must be no greater than 115 percent.

The Treasury Department will provide incentives to second lien holders who agree to full or partial extinguishment of their liens. To be eligible, servicers must execute a servicer participation agreement (SPA) with Fannie Mae on or before Oct. 3.

Some homeowners who have negotiated a loan modification will also be eligible for the FHA Short Refinance program.

Borrowers who have a permanent loan modification under the Making Home Affordable Modification Program (HAMP) can participate in the FHA Short Refinance program, and homeowners with non-HAMP modifications are eligible if they have made three monthly payments on time.

At an event in Maryland intended to showcase the Obama administration’s foreclosure prevention efforts, Housing Secretary Shaun Donovan said the FHA Short Refinance program could help unemployed families who need to relocate in order to find jobs.

"You can’t move if you can’t sell your home, and this administration recognizes that in some markets, if you can’t move, you can’t find a job," Donovan said. Programs that reduce not just interest rates but mortgage principal "can help connect families to jobs and help our economy recover."

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